COP26: Can we trust climate pledges amid asset manager scramble?

This week asset managers have scrambled to sign and declare their support for various pledges that demonstrate their ambition to fight climate change. In particular there has been the deforestation pledge and the additional signatories to the Net Zero Asset Managers initiative (NZAMI). 

However, what is the purpose of the pledges and what does it mean when a firm does not sign up?

"They are valuable signalling mechanism," said Graham Stock, emerging market senior sovereign strategist at BlueBay Asset Management.

In an interview in Glasgow he said it signals the way the market is moving and that organisations are thinking abut these issues.

"I would not draw that much of a distinction between the ones who have signed and the ones who have not," he said. "Because I think for the whole market, the direction of travel is fairly clear."

COP26 Blog: Live updates from events at Glasgow

On Tuesday (2 November) firms with $8.7trn in AUM committed to "make best efforts" to eliminate agricultural commodity-driven deforestation from their portfolios by 2025.

The loose wording raised eyebrows but said these loosely worded pledges are as far as they can go to get firms to sign up, because they are fiduciary managers of their clients money.

"Organisations are rightly cautious about signing up to too many of these public commitments," he said. "You get a web of different promises and it is complicated for portfolios because we only manage the money…we have mandates to manage them along lines the clients gave us."

Stock said what was particularly positive about the deforestation pledge is that it came in tandem with promises from governments, showing a collective initiative.

BlueBay, a fixed income asset manager that is part of the RBC, is not a signatory to the deforestation pledge but is actively working with the Brazilian government to tackle deforestation.

In June, working with 29 other investors with $3.7trn in AUM, it wrote a letter to raise its concerns around deforestation with the government.

BlueBay, which is a co-chair of the Investors' Policy Dialogue on Deforestation (IPDD), has since had conversations with several Brazilian ministers and is at COP26 to continue those conversations.

Scramble to pledge Net Zero

As COP26 got underway it was of little surprise that several press releases were released announcing firms signing up to NZAMI. And, on Monday (1 November), NZAMI announced 40 asset managers had disclosed their interim targets to achieve net zero by 2050.

Nintey One Asset Management did not sign up to the alliance straight away at its launch in December 2020, however, it ended up joining in July 2021.

Why the delay? It wanted to think about what the pledge means for the real world.

As signatories of the net zero initiative, asset managers commit to setting interim targets seeking a 50% global reduction in greenhouse gas emissions by 2030 and must review them on regular basis with the aim of increasing the proportion of assets until 100% are aligned with net zero goals.

"We need to think clearly about how net zero aspirations marries up with a net zero portfolio," said Tom Nelson co-head of thematic equity within the multi-asset team at Ninety One.

"The quickest route to meet the goal is to divest, however, while the portfolio might improve, the world outside will get worst."

Several sessions within COP26 are on whether divestment is still the right strategy for asset managers in their role to achieve net zero. Multiple high profile commentators, including Larry Fink, CEO of Blackrock, said the industry should not be pulling capital from the likes of oil and gas companies.

Nelson agrees divestment is not the right strategy and highlighted that oil and gas will not have an "overnight revolution" towards green energy, but they are striving towards a net zero goal. He believes the best way to get results faster is through continuous engagement and ensuring these companies have structural roadmaps.

One of Nintey One's central hopes following COP26 is the development of realistic goals and measurements for asset managers that do not necessarily lead to divestment but do lead to a net zero world.

Nintey One has also not signed up to the deforestation pledge.

A spokesperson from the firm explained: "Ninety One is committed in every respect to helping bring about a sustainable future. Before we align with pledges, we ensure that we do so with understanding and authenticity, which lets us then engage and influence.

"This, for example, was our process in signing the Net Zero Asset Managers Initiative. We right now apply an integration approach that addresses biodiversity and issues of deforestation, and are studying the deforestation pledge."

The greenwashing dilemma

However, Nelson acknowledged to Investment Week that this shift to engagement leaves the door open to more greenwashing than ever before. "It is a difficult road that does allow for, call it greenwashing, I prefer to call it freewheeling," he said.

By allowing oil and gas to sit seamlessly within an ESG friendly portfolio, investors may be unsure whether the asset manager is actually engaging with the companies towards a transition.

Nelson highlighted that ‘mainstream', or not specifically sustainable investing, will be forced to improve its engagement efforts in the future and hopes that this will serve to weed out those so called ‘freewheeling' managers and firms.

Last night (3 November) protestors outside the GFANZ drink reception held up signs around greenwashing, accusing the group and financial industry in general of taking such action by continuing to invest in fossil fuels.

"We can quite clearly see that fossil fuel industry has big plans to expand and finance is funding that," Mark Campanale, founder of the Carbon Tracker Initiative, said at a Green Horizon Summit debate today (4 November).

His fellow panellists said there was clearly a need for taxonomy and standards to regulate what good investing in fossil fuel companies looked like. However, Campanale disputed this view.

"We are looking at the wrong end of the animal," he said before stating that there should be more rules around stock exchanges and requirements to a be a member of a stock exchange.

He noted the IPO of Ben Creek Group, the owner of a metallurgical coal mine in October. It successfully raised £7m at a placing price of 10 pence per ordinary share, valuing the firm at £35m, and rose 5% on its first day of trading.

"Why is this still allowed," he questioned.